Insured against ranting and rambling

Moneyweb has an article describing the failure of the South African insurance industry to provide insurance to the wider population, including lower income markets such as the banking sector has done.

There are some interesting points to discuss here, and I’m certainly not saying the industry could not do more. However, there are some fairly fundamental social, pyschological and technical reasons that need to be overcome first. I’ve repeated some comments on the article below. I don’t claim this to be an exhaustive list, but I suggest that it lists some more likely suspects for the causes of imperfect penetration of the insurance market.

Sorry Felicity, but this article doesn’t even get into the details and shows a lack of understanding of the drivers of the need for insurance, and the perceived need for insurance.

Life Insurance
Comparing insurance to banking is disingenuous. Transactional banking makes your life easier, now. Basic savings account can work towards short-term goals. Life insurance will always seem less pressing.

1. Savings products will not work for lower income policyholders through an insurance policy because of the assumed average tax rate of 30%. It is a good deal for welathy investors in high marginal tax brackets, but awful for poor people. This is a function of the tax system not the insurers.
2. Life insurance requires payment of a premium now for a possible future benefit to dependents. There is no way this will ever be a priority need. This is human nature. Even if policies are sold, they will be lapsed very quickly and “better” uses are found for the premiums.
3. Lower income market segments typically have greater reliance on extended family for support. Thus, the need is lower for insurance. This is typical of developing countries, and declines as wealth and education increase (along with smaller families, later first children and less support from the extended family).

4. Funeral insurance may be sold through non-traditional outlets, but it is still exactly life insurance. Just that here the need is better appreciated and understood. Therefore it sells. Or do you want insurers to sell products for which there isn’t a need. (hey, easy on the comments that they already do… I don’t think insurers are angels!)
5. Credit life is required to protect the lenders from the death of the borrower. Again, there is a clear need and this form of insurance is quite widespread. Incidentally, funeral insurance and credit life are, unfortunately, typically quite profitable business lines. This might be a better line of attack against the insurance industry.
6. Insurance in South Africa has remarkably high penetration as measured by insurance premiums as a percentage of GDP and compared to other countries. This shows the succes of the industry, and also explains the limited growth prospects. Life insurance is typically less prevalent than short-term insurance in developing economies – if the problem isn’t restricted to South Africa maybe we should look for broader reasons?

7. I know several insurers who are targeting lower income markets with mixed success. The typical complaint against insurers is that they are overly profit-seeking. If (if!) this is true, then one can’t also complain that they aren’t following up on profitable opportunities? Again, maybe the reason is broader than you’ve implied.

Short-term insurance
Several other commentors have already described valid reasons for why short-term insurance take-up is lower than might be hoped. In many countries, third party liability cover is a legal requirement to drive a vehicle, and with good reason. This is the case in Lebanon, another country where I understand a bit about the insurance industry.

Losses on equity portfolios for our short-term insurers don’t really translate to a requirement to provide insurance to new markets. Maybe it suggests a requirement for less reliance on equity bull markets for performance in good years.

Short-term insurance in South Africa would be considered competitive by most standards. If there were large, profitable, untapped markets out there (with sufficient volumes, limited fraud and low enough claims frequencies and severities to make the premiums affordable to the target market) I expect they would be aggressively pursued. The thing about third party liability cover is that it isn’t greatly a function of the value of your vehicle. That makes it relatively expensive compared with the value of a car typical of a lower income target market. Being insured against someone else’s costs, when you would have no way to pay them otherwise and therefore it would be pointless to be sued, doesn’t sound like a very likely expenditure item.

The expenses of adminstering a policy are also not related to the size of policy or the value of insured property. One can argue whether current efficiency levels are right, but that is a separate argument (and one likely to suggest job cuts…).

The propotion of South Africans with short-term insurance should also be compared against those with sufficient assets to make it sensible. Direct comparisons against the populatio as a whole are close to meaninless.

Ok, I think I have done more than enough rambling and ranting. However, let me conclude with one observation on a quote from the article:

“And the plain fact is that local insurers have done way too little to develop products that offer value for the vast majority of South Africans. This is self-evident; precious few South Africans use insurance products.”

Just saying something is a fact doesn’t make it a fact. And please don’t abuse “self-evident”. Just because one item could be a cause of something does not make it the cause, or the only cause, or the primary cause. Especially not when you have just laid out a few of the reasons I also covered as to why insurance is a hard sell.

I wonder whether I should have mentioned the bad debts on house and car loans that are stacking up based (only partially!!) on pressure to lend to households with little wealth for large deposits and strained financials?

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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